CN Rail calls on customers to help prevent new rules

Claude Mongeau, Canadian National Railway Co. chief executive, reached out to his largest customers this week in a letter attempting to enlist their help in the railroad’s ongoing fight to prevent new regulations on the industry

Claude Mongeau, Canadian National Railway Co. chief executive, reached out to his largest customers this week in a letter attempting to enlist their help in the railroad’s ongoing fight to prevent new regulations on the industry. In it, he argues that while the new regulations are aimed at improving service, they may in fact do the opposite.

His message was met, however, with skepticism from shippers, who deemed it simply a last-ditch effort to stave off the new regulations Ottawa has promised in the coming months.

Transport Canada said Wednesday it remains committed to tabling legislation this fall that aims to give shippers greater recourse in their disputes with CN and its smaller rival, Canadian Pacific Railway Ltd. Those measures are expected to including legislating shippers’ rights to a service agreement and a process to establish one should negotiations fail.

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The new regulations stem from the federal Rail Freight Service Review, which was established to address chronic complaints of poor service from the country’s rail customers.

But Mr. Mongeau warned in the letter this week that the new regulations carry the risk of creating some unintended consequences and could potentially lead to worse service by disrupting the fluidity of the railway. He also argued many of the issues raised in the review had already been addressed by a series of service agreements reached with CN’s customers in its wake.

He said some industry associations have been lobbying for the right to have an arbitrator impose what sort of service the railway provides, and how it manages its own network. Others have been more measured, he said, but are still looking for the regulations as a “backstop” to prevent the railways from slipping back into their old ways.

“This is simply unprecedented in a market-based economy and it would be a dangerous path to follow – one which could have serious consequences for the rail industry and, ultimately, the supply chain that serves you,” Mr. Mongeau said in the letter.

He reiterated that he didn’t feel greater regulation was needed, and asked his customers to consider whether they did too. But he said if Ottawa is determined to introduce new laws, he hoped CN’s customers would support his efforts see disputes put to mediation before arbitration. If arbitration is necessary, he argues it should be conducted by the Canadian Transportation Agency rather than a string of arbitrators, and should be reserved for captive customers or those who can prove commercial harm has been incurred.

But not all of CN’s customers have been able to reach service agreements with the railway, and continue to complain about poor service despite the review’s findings.

Richard Garneau, Resolute Forest Products chief executive, said his company was unable to agree to the terms of a service agreement with CN and continues to incur “significant” financial losses as a result. He said that on average about 8% of the rail cars Resolute Forest receives at its mills are damaged, making it impossible to load its products onto them. Another 7% leak or require repair en route, which impacts the reliability of his deliveries, he said.

“The service we’re getting at our mills in Quebec and Ontario needs to be improved,” Mr. Garneau said. “We need a mechanism to ensure the service issue is addressed.”

While Mr. Garneau characterized himself as a captive customer, he said Resolute Forest is CN’s 21st largest. He is not alone in the calls for improved service either.

Bob Ballantyne, chairman of the Coalition of Rail Shippers, characterized the letter this week from Mr. Mongeau as a “last-ditch, Hail Mary attempt to head off the legislation.”

The Coalition of Rail Shippers is made up of 17 industry associations and estimates its members account for 80% of CN and CP’s Canadian revenue, Mr. Ballantyne said.

He said most of his members support the new measures, and argued that Mr. Mongeau’s assertion that they would amount to the re-regulation of the industry “is not correct at all.” “What the shippers are essentially looking for is effective commercial negotiations, and when there are only two sellers in the marketplace, you’re not as likely to have effective competition and therefore get effective commercial negotiations,” he said.

Mr. Ballantyne argues the shippers are instead looking to the review for a framework that will encourage more balanced and effective negotiations with the railways.